Question for small-scale developers: what would you do differently?

Hi Ana

Nice to see another female developer on this forum.

I have been developing in Perth and Melbourne markets over the last 3-4 years, and just sold 4 townhouse development OTP in Melbourne and just got plans and permits approved for another development in Croydon, Melb. I totally agree with you Melb is a very hot market has been for some time and momentum has continued, my guess is the historical low interest rates and FHB market is helping to drive this market

I don’t know your particular patch but I have heard these areas are very good. I also don’t have a crystal ball, but I do focus on risk and protecting what I have made my profits.

At this stage of the Melb market very important to work out what is happening in your particular area/suburb, what are developers building, is there too much supply coming on the market. Is everything selling, how long is it taking to sell. One way to reduce risk is to build but sell OTP, however there needs to be a market for this. Re agents should be able to give you feedback on this. Once you gage this then you can work out which way to go.

What do your numbers look like? Is there plenty of fat in the deal? If you built and you had to drop your end values/sales would you still make a profit?

Its important to look at all the scenarios.

I have sold 2 development sites with DA approval with over 30%+ profit, this is excellent strategy but this only works if the builder has enough fat in it. No one is interested in buying a development site if they will not make money at the end.
First step is to work out a feasibility on everything, a $ value. At the moment in Melb depending on the quality/specification of the build you could be looking at anywhere from $1200-1500 per sqm to build.

Many investors do not realise that 80% of developers actually lose money. Everyone wants to be a developer, but if it were that easy everyone would do it and they would be making money, not so.

I think you are wise to consider market conditions, I have seen plenty of developers who do not do this and at the end they make no profit or worse lose money.

Marisa
MTR:)

• This reply was modified 8 years, 1 month ago by  MTR.

Hi Ana
Interesting, re agents in Melb told me that they had reduced stock this winter and this drove prices up.

If you are considering buying a block in Melbourne the most important thing to remember is that land has already gone up in Melb rising since 2013, so you may be paying too much at this point in the cycle, which means the figures may not stack up unfortunately.

As a developer I notice I make my money on the land that is if you get the timing right, this in turn reduces your risk because you wont need to build, you can just flip it or put a DA together and add value, so you end up with choices.

I have been asked many times what is the best way to learn and how to start developing?

Start small and work up to larger projects and learn along the way. It could be an older house and build at the rear and sell the front and keep the new product, or sell the lot and make a profit. If you decide to sell then its important to get the correct accountant advice on structuring to reduce/minimise tax.

It could be land and house packages, source the land and use a project builder, good way to learn and lower entry level.

I think you are wise to have concerns about buying in Melb market at this stage of the cycle. Its great that you have an architect as a friend.
Developing to make a profit has a lot to do with timing the market, market conditions and building the right product at the right price.

I think its great that you source a site, but if it makes no sense, the figures don’t stack up, don’t do it.

Also in your contingency I would be very conservative with the end values because the market may change. I would also look at the scenarios if you can not sell these, will the rent cover the interest? I play in the lower end markets once again this is to reduce risk so if I can not sell the rent will pay interest.

One step at a time, keep researching and learning, more than happy to help with any questions, I really am still on “P” plates, but amazing what I have learnt from others and the thing is you never stop learning, always tweaking….LOL

Marisa
MTR:)

Hi Ana,

Have you considered a money partner or JV partner to help you with the deposit and stamp duty? Food for thought.

Hi John
The building prices can vary significantly especially when we see boom times because builders have choices with regards on what projects they will take on and also their contractors start to jack up the prices.
I have been costing at around $1300 per sqm, I contacted many real estate agents in the area and obtained a list of builders and then I tendered it out and also narrowed builders down by looking at the quality of their work.

My townhouses are a mixture of double storey and single.

Hope this helps

MTR
Marisa:)

Hi All, still learning the terminology here – what’s a DA?